Year to date, Volkswagen (VLKAY, Financial) is down almost 20%, mostly due to the uncertainty regarding regulators' intense scrutiny of its diesel vehicles. The company was fined $1 billion euros by a German public prosecutor, but that hasn’t tarnished its global image, and it certainly hasn’t hit the firm’s earnings or brand power. Also, because of the nature of the fine, EU regulations precludes any other EU country from fining the company for the same breach of monitoring duties. Chances are, VW is in the clear and will get back to pounding out cash.
If you haven’t been keeping up with Volkswagen, it owns a bevy of great car brands including Audi, Bentley, Bugatti, Lamborghini, Porsche and of course the iconic VW. Like other big car makers, it provides dealer financing to support floor plans, consumer financing for vehicle purchases, and other financial services. Of course, financing adds a lot of debt -- 74 billion euros in long-term debt and 55 billion euros in short-term debt equates to roughly $150 billion and just $33 billion in cash. Granted, it does earn $13 billion a year net on $40 billion in gross profit, making the debt affordable.
The stock trades over-the-counter (OTC) here in the U.S., so the daily volume isn’t great at just 140,000 shares on average. However, all the other metrics are the same and by 2020, the company plans to have a large roll-out of electric vehicle car-sharing which its testing in Germany next year. The vehicle-on-demand fleets will consist entirely of electric zero-emission cars.
This is the future of auto use in some respects. The sharing market still has a ton of upside potential, but even if it surpasses $11 billion by 2024 as some expect, that will still represent just a small portion of total car sales. Even Uber’s $37 billion in bookings is just a fraction of total vehicle sales annually.
Volkswagen also enjoys premium pricing in many markets with its luxury brands like Bentley, Bugatti and Lamborghini, which evoke images of wealth, luxury and exotic street racing machines. But those are not major profit centers for the company, despite the durable competition advantages each offers.
It’s the Audi, Porsche, and VW brands that provide the growth from the low end consumer and up. Very few people (even the wealthiest) buy a Bentley, Bugatti or Lamborghini, but they’re fun to look at. By comparison, Ferrari generates a solid 559 million euros in profit a year on 3.4 billion euros in sales, yet its market cap of $34 billion compared to Volkswagen’s $84 billion is laughable.
Volkswagen is a beast of a company with 100 production facilities across 27 countries staffed by more than 640,000 employees, collectively generating over $270 billion in annual revenue. It generates more in gross profit than even unicorn startups could dream about burning through. Those numbers also represent top-line growth of 105% in the last 10 years, or $119 billion of yearly recurring sales. Going forward, the company should start to push more of that to the bottom line.
Analysts are expecting earnings per share all over the board, but given the company trades at just six times current earnings, any growth coupled with multiple expansion could put this stock into the $50 range.
Disclosure: I am not long or short any stock mentioned in this article.
